Item 2. Management’s Discussion and Analysis
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Special Note Regarding Forward-Looking Statements", Part I, Item 1 and Part II, Item 1A of this Quarterly Report on Form 10-Q.
OVERVIEW
As a global leader in designing, developing, marketing, and distributing outdoor, active and lifestyle products, our mission is to connect active people with their passions. We manage our product line in two major categories: apparel, accessories, and equipment products and footwear products. We provide our products through our four brands: Columbia, SOREL, Mountain Hardwear, and prAna. Apparel, accessories, and equipment products are provided by our Columbia, Mountain Hardwear and prAna brands. Footwear products are provided by our Columbia and SOREL brands. We sell our products in more than 100 countries and operate in four geographic segments: U.S., LAAP, EMEA, and Canada.
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We are investing in our strategic priorities to:
• accelerate profitable growth;
• create iconic products that are differentiated, functional and innovative;
• drive brand engagement through increased, focused demand creation investments;
• enhance consumer experiences by investing in capabilities to delight and retain consumers;
• amplify marketplace excellence, with digitally-led, omni-channel, global distribution; and
• empower talent that is driven by our core values through a diverse and inclusive workplace.
Ultimately, we expect our investments to enable market share capture across our brand portfolio, expand gross margin, improve selling, general and administrative expense efficiency, and drive improved operating margin over the long-term. We seek to bring additional consumer segments to our brands by proactively managing the promotional activity of the brands in the marketplace. For the Columbia brand, we are working to establish the Columbia.com site as the best expression of the brand through enhancements to the consumer experience as well as generally less promotion and discount activity.
Profit Improvement Program
As part of our strategic priorities, we are implementing a multi-year profit improvement program to accelerate profitable growth and improve the efficiency of our operations. We are focused on four areas of cost reduction and realignment, including:
• operational cost savings;
• organizational cost savings;
• operating model improvements; and
• indirect, or non-inventory, spending.
When the benefits of this program are combined with the cost savings we anticipate to receive from normalized inventory levels, we believe we can reach $125 million to $150 million in annualized savings by 2026. We anticipate these cost savings will ramp up over the course of 2024 and 2025, with the full benefit being realized in 2026. In 2024, we anticipate realizing approximately $75 million to $90 million in realized cost savings, net of approximately $3 million to $4 million of severance and other costs.
Business Environment and Trends
Increasing Competitive Environment | We believe many brands have shifted their strategies to capitalize on the emergence of casual and lifestyle trends. The versatility of casual and lifestyle products provides consumers the ability to use these products in a variety of settings, including outdoor activities. This shift has been evident in both the apparel and footwear product categories. We believe this trend has accelerated because of changes in consumer behavior resulting from the COVID-19 pandemic, which has resulted in an increasingly competitive apparel and footwear marketplace.
Economic Environment Impacting Demand | We believe general economic uncertainty is impacting consumer and customer behavior and demand. Customers have been increasingly cautious managing inventory and in placing advance orders. This cautiousness has been most pronounced in the U.S., but we believe that retailer prudence is spreading to other regions, including Canada and, to a lesser extent, Europe. Consumer demand, particularly in the U.S., has been generally soft for outdoor apparel and footwear products. We anticipate these trends will persist throughout 2024.
Promotional and Clearance Environment | Since last year, we have been proactively managing promotional activity on Columbia.com to help establish the site as the best expression of the brand. However, we believe consumers are still seeking value from us, particularly in the U.S. This has resulted in reduced demand for our direct-to-consumer ("DTC") e-commerce sites and branded stores. To capture demand associated with value conscious consumers, we have increasingly relied on our fleet of DTC brick-and-mortar stores including our outlet stores and clearance locations, which offer discounted and clearance merchandise. The use of temporary clearance stores results in lower DTC product margins, increased SG&A expenses and modest operating income. We believe this method of liquidation results in stronger financial returns to the Company in comparison to wholesale closeout sales channel alternatives and has a less disruptive impact in the marketplace. We anticipate continuing to utilize temporary clearance locations to assist with inventory liquidation throughout 2024.
Changing Consumer Shopping Habits | We believe consumers in the U.S. have adjusted shopping habits in a post-COVID pandemic world and have increasingly participated in brick-and-mortar retail shopping experiences. As a result, we expect our U.S. e-commerce channel to
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continue to be challenged year-over-year. We believe this is a transitional trend and that, over time, growth in digital environments will outpace physical retail sales growth.
Distribution Center and Third-Party Capacity Pressure | Elevated inventory levels resulted in storage and process capacity pressures within our distribution centers and third-party logistics operations throughout 2023. These pressures included additional inventory carrying costs related to incremental outside storage, and other inventory related holding and handling costs, including losses in productivity, as we worked to normalize our inventory position. We exited 2023 with more normalized inventory levels. As these storage and process capacity pressures have alleviated, we have begun to realize lower distribution-related expenses and expect to see further benefit in our operating results for full year 2024.
Favorable Freight Cost Environment | Over the past year, we have realized significant declines in ocean freight rates and costs in comparison to prior year elevated levels. These lower ocean freight rates resulted in substantially lower inbound freight costs which benefited our gross margin. Looking forward, we expect less of a favorable benefit from lower inbound freight costs. Worldwide ocean freight rates continue to decline and we expect to achieve additional cost savings and resulting gross margin improvement as we finalize freight contracts which take effect beginning June 1. We anticipate these lower ocean freight costs will persist and continue to benefit gross margin throughout 2024.
Seasonality | Our business is affected by the general seasonal trends common to the industry, including seasonal weather and discretionary consumer shopping and spending patterns. Our products are marketed on a seasonal basis, and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. In 2023, nearly 60% of our net sales and nearly 80% of our operating income were realized in the second half of the year.
Heightened Geopolitical Risk | We sell our products in more than 100 countries and our ability to sell in certain markets may be impacted by ongoing geopolitical tensions. We believe these tensions will remain elevated and have manifested, and will continue to manifest, themselves in certain regions where we operate.
Increasing Regulatory Environment | Recently, the number of regulations at the global and jurisdictional level impacting our business, and in particular our products, has significantly increased. We expect this trend to continue, and as a result, will impact our expenses, product input costs and ultimately our products, which may in turn impact our revenue. These regulatory matters at a minimum include regulations related to climate, social, privacy, and product chemistry. For example, in anticipation of the effectiveness of the regulations in California and New York states related to perfluoroalkyl and polyfluoroalkyl substances ("PFAS"), we have been working to eliminate PFAS chemicals across our global product line. We stopped manufacturing any apparel or footwear with PFAS intentionally added prior to our Fall 2024 season. These PFAS matters may result in a more promotional environment in 2024 as retailers move through merchandise containing PFAS.
RESULTS OF OPERATIONS
The following discussion of our results of operations and liquidity and capital resources should be read in conjunction with Part I, Item 1 of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measure
To supplement financial information reported in accordance with accounting principles generally accepted in the United States ("GAAP"), we disclose constant-currency net sales information, which is a non-GAAP financial measure, to provide a framework to assess how the business performed excluding the effects of changes in foreign currency exchange rates against the United States dollar between comparable reporting periods. We calculate constant-currency net sales by translating net sales in foreign currencies for the current period into United States dollars at the exchange rates that were in effect during the comparable period of the prior year. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing an aspect of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of our business and operations. In particular, investors may find the non-GAAP measure useful by reviewing our net sales results without the volatility in foreign currency exchange rates. This non-GAAP financial measure also facilitates management's internal comparisons to our historical net sales results and comparisons to competitors' net sales results. Constant-currency financial measures should be viewed in addition to, and not in lieu of or superior to, our financial measures calculated in accordance with GAAP.
The following discussion includes references to constant-currency net sales, and we provide a reconciliation of this non-GAAP measure to the most directly comparable financial measure calculated in accordance with GAAP below.
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Results of Operations — Consolidated
The following table presents the items in our unaudited Condensed Consolidated Statements of Operations, both in dollars and as a percentage of net sales:
Three Months Ended March 31,
(in millions, except for percentage of net sales and per share amounts) 2024 2023
Net sales $ 770.0 100.0 % $ 820.6 100.0 %
Cost of sales 380.4 49.4 % 421.1 51.3 %
Gross profit 389.6 50.6 % 399.5 48.7 %
Selling, general and administrative expenses 349.3 45.4 % 347.4 42.3 %
Net licensing income 4.4 0.6 % 4.3 0.5 %
Operating income 44.7 5.8 % 56.4 6.9 %
Interest income, net 9.2 1.2 % 3.3 0.4 %
Other non-operating income, net 0.2 — % 0.9 0.1 %
Income before income tax 54.1 7.0 % 60.6 7.4 %
Income tax expense 11.8 1.5 % 14.4 1.8 %
Net income $ 42.3 5.5 % $ 46.2 5.6 %
Diluted earnings per share $ 0.71 $ 0.74
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Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Net Sales. Net sales by brand, product category and channel are summarized in the following table:
Three Months Ended March 31,
(in millions, except for percentages) Reported
Net Sales
2024
Adjust for Foreign Currency Translation Constant-currency
Net Sales
2024 (1)
Reported
Net Sales
2023
Reported
Net Sales
% Change Constant-currency
Net Sales
% Change (1)
Brand Net Sales:
Columbia $ 663.9 $ 4.0 $ 667.9 $ 702.8 (6)% (5)%
SOREL 45.7 (0.1) 45.6 60.5 (24)% (25)%
prAna 31.3 — 31.3 32.5 (4)% (4)%
Mountain Hardwear 29.1 0.1 29.2 24.8 17% 18%
Total $ 770.0 $ 4.0 $ 774.0 $ 820.6 (6)% (6)%
Product Category Net Sales:
Apparel, Accessories and Equipment $ 619.0 $ 3.3 $ 622.3 $ 632.6 (2)% (2)%
Footwear 151.0 0.7 151.7 188.0 (20)% (19)%
Total $ 770.0 $ 4.0 $ 774.0 $ 820.6 (6)% (6)%
Channel Net Sales:
Wholesale $ 390.9 $ 1.1 $ 392.0 $ 452.5 (14)% (13)%
Direct-to-consumer 379.1 2.9 382.0 368.1 3% 4%
Total $ 770.0 $ 4.0 $ 774.0 $ 820.6 (6)% (6)%
(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.
Overall, the decline in global net sales was driven by our US and Canada wholesale and LAAP and EMEA distributor businesses. The declines in US and Canada wholesale net sales primarily reflected lower Spring 2024 orders, largely for the Columbia brand, while the decline in our distributor businesses' net sales reflected earlier shipment of Spring 2024 orders which shipped in the fourth quarter of 2023.
Lower footwear net sales reflected declines in both our Columbia and SOREL brands. Footwear demand in the outdoor industry has softened while competitive pressures within the footwear category have amplified.
Our global DTC net sales reflected a 9% increase in brick-and-mortar net sales, partially offset by a 7% decrease in e-commerce net sales for the quarter ended March 31, 2024 compared to the same period in the prior year. The growth in net sales from our DTC retail store business was driven by contributions from temporary clearance locations and new stores and, to a lesser extent, increased store productivity. The decline in our DTC e-commerce net sales, which was predominantly focused in the U.S., was attributable to a number of factors, including lower discounts and promotions which fueled demand in the first quarter of 2023, shifts in consumer behavior as consumers seek value in response to continued inflationary pressures, and a more competitive outdoor products marketplace.
Gross Profit. Gross profit is summarized in the following table:
Three Months Ended March 31,
(in millions, except for percentages and basis points) 2024 2023 Change
Gross profit $ 389.6 $ 399.5 $ (9.9) (2) %
Gross margin 50.6 % 48.7 % 190 bps
Gross margin expanded primarily due to the following factors:
• an approximate 190 bps increase related to lower inbound freight costs; and
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• favorable region and channel net sales mix; partially offset by
• by lower DTC product margins, which were primarily driven by higher DTC retail store clearance and promotional activity, including sales of excess inventory through our temporary clearance locations and outlet stores.
Selling, General and Administrative Expenses. SG&A expenses is summarized in the following table:
Three Months Ended March 31,
(in millions, except for percentages and basis points) 2024 2023 Change
Selling, general and administrative expenses $ 349.3 $ 347.4 $ 1.9 1 %
Selling, general and administrative expenses as percent of net sales 45.4 % 42.3 % 310 bps
SG&A expenses increased primarily due to the following factors:
• higher omni-channel expenses of $10.8 million, primarily reflecting higher DTC expenses, including personnel expenses and costs associated with temporary clearance locations and new stores; partially offset by
• lower supply chain expenses, reflecting decreased global distribution center expenses resulting from normalized inventory levels, as well as the non-recurrence of third-party logistics transition-related costs incurred in the comparable period of 2023.
Interest Income, net. Interest income, net is summarized in the following table:
Three Months Ended March 31,
(in millions, except for percentages) 2024 2023 Change
Interest income, net $ 9.2 $ 3.3 $ 5.9 179 %
Interest income, net as a percent of net sales 1.2 % 0.4 %
Interest income, net increased primarily reflecting higher yields on increased levels of cash, cash equivalents and short-term investments.
Income Tax Expense. Income tax expense and the related effective income tax rate are summarized in the following table:
Three Months Ended March 31,
(in millions, except for percentages) 2024 2023 Change
Income tax expense $ 11.8 $ 14.4 $ (2.6) (18) %
Effective income tax rate 21.9 % 23.7 %
Our effective income tax rates for the three months ended March 31, 2024 and 2023 were impacted by discrete tax items, which lowered the effective income tax rate in each period. For the three months ended March 31, 2024, our effective income tax rate was primarily impacted by a benefit related to a non-recurring decrease in foreign withholding taxes. For the three months ended March 31, 2023, our effective income tax rate was primarily impacted by a non-recurring benefit related to a foreign currency loss resulting from an intercompany transaction.
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Results of Operations — Segment
Segment operating income includes net sales, cost of sales, SG&A expenses, and net licensing income for each of our four reportable geographic segments.
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Net sales by geographic segment are summarized in the following table:
Three Months Ended March 31,
(in millions, except for percentage changes) Reported
Net Sales
2024
Adjust for Foreign Currency Translation Constant-currency
Net Sales
2024 (1)
Reported
Net Sales
2023
Reported
Net Sales
% Change Constant-currency
Net Sales
% Change (1)
U.S. $ 474.4 $ — $ 474.4 $ 517.5 (8)% (8)%
LAAP 138.7 6.6 145.3 136.4 2% 7%
EMEA 104.5 (2.2) 102.3 108.3 (4)% (6)%
Canada 52.4 (0.4) 52.0 58.4 (10)% (11)%
$ 770.0 $ 4.0 $ 774.0 $ 820.6 (6)% (6)%
(1) Constant-currency net sales is a non-GAAP financial measure. See "Non-GAAP Financial Measure" above for further information.
Operating income for each reportable segment and unallocated corporate expenses are summarized in the following table:
Three Months Ended March 31,
(in millions) 2024 2023 Change
U.S. $ 73.0 $ 81.6 $ (8.6)
LAAP 21.8 18.3 3.5
EMEA 19.1 20.4 (1.3)
Canada 11.2 10.8 0.4
Total segment operating income 125.1 131.1 (6.0)
Unallocated corporate expenses (80.4) (74.7) (5.7)
Operating income $ 44.7 $ 56.4 $ (11.7)
U.S.
U.S. operating income decreased $8.6 million to $73.0 million, or 15.4% of net sales, for the first quarter of 2024 from $81.6 million, or 15.8% of net sales, for the comparable period in 2023. The decrease was driven primarily by decreased net sales and gross margin, partially offset by lower SG&A expenses. U.S. net sales decreased $43.1 million, or 8%, for the first quarter of 2024, compared to the same period in 2023. U.S. net sales decreased primarily due to lower Spring 2024 wholesale orders, partially offset by an increase in net sales in our DTC brick-and-mortar business. As of March 31, 2024, our U.S. business operated 161 retail stores, compared to 156 stores as of March 31, 2023. In addition, we operated 44 temporary clearance locations as of March 31, 2024 to support inventory reduction efforts, compared to 8 temporary clearance locations as of March 31, 2023. Lower SG&A expenses were primarily driven by lower supply chain and demand creation expenses, partially offset by higher omni-channel expenses, as discussed above. SG&A expenses increased as a percentage of net sales to 34.5% for the first quarter of 2024 compared to 33.1% for the same period in 2023.
LAAP
LAAP operating income increased $3.5 million to $21.8 million, or 15.7% of net sales, for the first quarter of 2024 from $18.3 million, or 13.4% of net sales, for the comparable period in 2023. The increase was driven primarily by increased net sales and gross margin, partially offset by increased SG&A expenses. LAAP net sales increased $2.3 million, or 2% (7% constant-currency), for the first quarter of 2024, compared to the same period in 2023. Increased LAAP net sales were primarily driven by our China business, partially offset by lower LAAP distributor net
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sales. Increased China net sales reflected higher consumer demand benefiting all channels of distribution. LAAP SG&A expenses increased as a percentage of net sales to 41.7% for the first quarter of 2024 compared to 40.6% for the same period in 2023.
EMEA
EMEA operating income decreased $1.3 million to $19.1 million, or 18.3% of net sales, for the first quarter of 2024 from $20.4 million, or 18.8% of net sales, for the comparable period in 2023. The decrease was driven by decreased net sales combined with increased SG&A expenses due to increased headcount to support the business. EMEA net sales decreased $3.8 million, or 4% (6% constant-currency), for the first quarter of 2024, compared to the same period in 2023, driven by lower EMEA distributor net sales and lower Spring 2024 wholesale orders, partially offset by an increase in our Europe-direct DTC net sales. EMEA SG&A expenses increased as a percentage of net sales to 31.3% for the first quarter of 2024 compared to 28.0% for the same period in 2023.
Canada
Canada operating income increased $0.4 million to $11.2 million, or 21.3% of net sales, for the first quarter of 2024 from $10.8 million, or 18.5% of net sales, for the comparable period in 2023. The increase primarily resulted from lower SG&A expenses, partially offset by decreased net sales and gross margin. Canada net sales decreased $6.0 million, or 10% (11% constant-currency), for the first quarter of 2024, compared to the same period in 2023, primarily due to lower Spring 2024 wholesale orders, partially offset by an increase in DTC brick-and-mortar business. Canada SG&A expenses increased as a percentage of net sales to 27.9% for the first quarter of 2024 compared to 26.8% for the same period in 2023.
Unallocated Corporate Expenses
Unallocated corporate expenses increased by $5.7 million to $80.4 million for the first quarter of 2024 from $74.7 million for the same period in 2023, largely driven by higher personnel expenses.
LIQUIDITY AND CAPITAL RESOURCES
Including cash, cash equivalents, short-term investments and available committed credit lines, we had approximately $1.5 billion in total liquidity as of March 31, 2024. Our liquidity may be affected by the general seasonal trends common to the industry. Our products are marketed on a seasonal basis and our sales are weighted substantially toward the third and fourth quarters, while our operating costs are more equally distributed throughout the year. Our cash and cash equivalents and short-term investments balances generally are at their lowest level just prior to the start of the U.S. holiday season and increase during the fourth quarter from collection of wholesale business receivables and fourth quarter DTC sales. This trough cash position is impacted by the amount of product we order from our contract manufacturers in anticipation of customer demand and is more heavily impacted in advance of periods of expected high demand.
Cash Flow Activities
Cash flows are summarized in the following table:
Three Months Ended March 31,
(in millions) 2024 2023 Change
Net cash provided by (used in):
Operating activities $ 106.8 $ 78.0 $ 28.8
Investing activities 37.1 (111.7) 148.8
Financing activities (71.4) (35.6) (35.8)
Net effect of exchange rate changes on cash (4.4) 0.1 (4.5)
Net increase/(decrease) in cash and cash equivalents
$ 68.1 $ (69.2) $ 137.3
The change in cash flows provided by operating activities was driven by a $31.8 million increase in cash provided by changes in assets and liabilities, partially offset by a $3.0 million decrease in cash provided by net income and non-cash adjustments. The most significant comparative changes in assets and liabilities included Inventories and Accounts receivable , and to a lesser extent, Prepaid expenses and other current assets, and Accounts payable . The $60.2 million increase in cash provided by Inventories reflected a decrease in inventory as we curtailed inventory purchases to compensate for elevated inventories exiting 2022 and liquidated excess inventory levels throughout 2023
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and the first quarter of 2024. The $18.4 million decrease in cash used in Accounts payable was primarily driven by lower inventory receipts in the first quarter of 2024 compared to the first quarter of 2023. These amounts were partially offset by the $32.5 million decrease in cash provided by Accounts receivable primarily driven by lower wholesale net sales for the quarter. Additionally, changes in Prepaid expenses and other current assets resulted in cash used of $0.5 million for the first quarter of 2024 compared to cash provided of $23.1 million for the first quarter of 2023, driven by overall decreases in inventory prepayments from December 31, 2022.
Net cash provided by investing activities was $37.1 million for the three months ended March 31, 2024, compared to $111.7 million of cash used in investing activities for the three months ended March 31, 2023. For the 2024 period, net cash provided by investing activities consisted of $110.9 million in cash provided by sales and maturities of short-term investments, partially offset by $59.0 million in cash used for purchases of short-term investments and $14.8 million for capital expenditures. For the 2023 period, net cash used in investing activities consisted of $98.2 million in purchases of short-term investments and $14.0 million for capital expenditures, partially offset by $0.6 million provided by sales and maturities of short-term investments.
Net cash used in financing activities was $71.4 million for the three months ended March 31, 2024 compared to $35.6 million for the three months ended March 31, 2023. For the 2024 period, net cash used in financing activities primarily consisted of repurchases of common stock of $50.2 million and dividend payments to our shareholders of $17.9 million. For the 2023 period, net cash used in financing activities primarily consisted of repurchases of common stock of $15.3 million and dividend payments to our shareholders of $18.6 million.
Sources of Liquidity
Cash and cash equivalents and short-term investments
As of March 31, 2024, we had cash and cash equivalents of $418.5 million and short-term investments of $369.3 million, compared to $350.3 million and $414.2 million, respectively, as of December 31, 2023 and $361.0 million and $99.5 million, respectively, as of March 31, 2023.
Domestic Credit Facility
Refer to Note 7 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2023 for further information regarding the domestic credit facility.
As of March 31, 2024, we had available an unsecured, committed revolving credit facility, which provides for borrowings up to $500.0 million. We were in compliance with all associated covenants and there was no balance outstanding under the facility.
International Credit Facility
As of March 31, 2024, our European subsidiary had available an unsecured, committed line of credit, which is guaranteed by the Company and provides for borrowings up to €4.4 million (approximately US$4.7 million). There was no balance outstanding under the facility.
Other Sources
As of March 31, 2024, collectively, our international subsidiaries had unsecured, uncommitted lines of credit, credit facilities and overdraft facilities, providing for borrowings up to approximately US$104.5 million. There was no balance outstanding under these facilities.
Capital Requirements
Our expected short-term and long-term cash needs are primarily for working capital and capital expenditures. We expect to meet these short-term and long-term cash needs primarily with cash flows from operations and, if needed, borrowings from our existing credit facilities.
Our working capital management goals include maintaining an optimal level of inventory necessary to deliver goods on time to our customers and our retail stores to satisfy end consumer demand, alleviating manufacturing capacity constraints, and driving efficiencies to minimize the cycle time from the purchase of inventory from our suppliers to the collection of accounts receivable balances from our customers. Inventory balances may be elevated in advance of periods of expected high demand. As of March 31, 2024, our inventory balance decreased to $607.4 million, compared to $959.2 million as of March 31, 2023, driven by a meaningful reduction in current season and carryover inventory resulting from lower inventory buys, as well as the use of our outlet stores and temporary clearance locations to profitably sell excess merchandise. We believe older season inventories represent a manageable portion of our total inventory mix.
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We have planned 2024 capital expenditures of approximately $60 to $80 million. This includes investments in our DTC operations, including new stores and digital and supply chain capabilities to support our strategic priorities. Our actual capital expenditures may differ from the planned amounts depending on factors such as the timing of system implementations and new store openings and related construction.
Our long-term goal is to maintain a strong balance sheet and a disciplined approach to capital allocation. Dependent upon our financial position, market conditions and our strategic priorities, our capital allocation approach includes:
• investing in organic growth opportunities to drive long-term profitable growth;
• returning at least 40% of free cash flow to shareholders through dividends and share repurchases; and
• considering opportunistic mergers and acquisitions.
Free cash flow is a non-GAAP financial measure. Free cash flow is calculated by reducing net cash flow from operating activities by capital expenditures. Management believes free cash flow provides investors with an important perspective on the cash available for shareholders and acquisitions after making the capital investments required to support ongoing business operations and long-term value creation. Free cash flow does not represent the residual cash flow available for discretionary expenditures since it excludes certain mandatory expenditures. Management uses free cash flow as a measure to assess both business performance and overall liquidity.
Other cash commitments
Our inventory purchase obligations wer e $675.0 million a s of March 31, 2024, compared to $343.4 million and $540.6 million as of December 31, 2023 and March 31, 2023, respectively.
There have been no other significant changes to our other cash commitments as described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.
CRITICAL ACCOUNTING ESTIMATES
Management's discussion and analysis of our financial condition and results of operations are based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make various estimates and judgments that affect reported amounts of assets, liabilities, sales, cost of sales, and expenses and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgments involved in the accounting for sales reserves, allowance for uncollectible accounts receivable, excess, close-out and slow-moving inventory, impairment of long-lived assets, intangible assets and goodwill, and income taxes have the greatest potential effect on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results may differ from the estimates we use in applying these critical accounting policies and estimates. We base our ongoing estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2023 for additional information regarding our critical accounting policies and estimates.
Management regularly discusses with our audit committee our critical accounting estimates and the development and selection of these accounting estimates. These discussions typically occur at our quarterly audit committee meetings and include the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation.
There have been no significant changes to the Company's significant accounting policies described in Note 2 in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2023.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 1 in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has not been any material change in the market risk disclosure contained in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.
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